Opinion: Suggestions from a small business for the budget

By Ranjit Hulugalle

I run a printing business which employs nearly 100 people in Biyagama, outside of the BOI — Board of Investment zones for export. It is not in the zone and does not get any privileges, tax concessions and other benefits that companies receive at the zone.

Our main inputs are imported papers, and different types of inks. Our output is books, magazines, wrapping papers, newspapers, inserts and posters. During a very short period we also, as one of 30 printers, print school books for the government in the three months between September and November.

The taxation rate we pay on profits is 28% and we pay approximately Rs400K per month in EPF and ETF payments. We run at full capacity, in mostly fully depreciated machinery that is quite old, and we have business that is about 25% more than our present capacity, that we turn down for lack of capacity. As we work at capacity, we run two shifts and work 24hrs a day, except on Sundays, where double rates of overtime have to be paid.

We are faced with a labor shortage of skilled labor, willing to work as Machine minders, who can work overtime when needed, and the labor shortage in this area amounts to about 25,000 vacancies.

On Friday, we lost one member of staff who has been with us for 18 years, because he just got accepted to a job in Korea, and he had to fly out at a moments notice today. Korea’s gain is our loss, as it will take some time to train a person to his skill level, whilst he is going to Korea to do a job of a laborer unrelated to this field. Of course he can expect a rupee equivalent compensation of Rs150K a month, about 2.5 times what he earned here including overtime.

We have lately suffered from unannounced power cuts, which cause massive disruptions, when machines suddenly stop, and have to be restarted, with the attendant wastage, and losses. We have a high powered generator to run when we need to, but consumes a heavy diesel load, and cannot automatically start upon an unexpected power outage to prevent disruption.

The Govt. gazetted a monthly pay increase of Rs2,500 per member of staff, (backdated to May 1st 2015) which when you add overtime to the increased basic wages, resulted in a wage bill increase of Rs500,000 per month. Annualized cost to the company Rs6 million (Govt loses tax Rev 28%).

As of today, we are still owed, Rs3.5 million from the Educational Publications Department (EPD) of the Govt. for School Books, which we invoiced before 31st December 2015, now over 9 months old. When we cost the job, assume a three month’s funding OD cost, not a 9 month one!

We run on high interest loans and overdrafts, and accordingly we have had to increase our overdraft, due to the delay in receiving the payment above, and for the purchase of paper for the current years books we are currently printing, where paper cost is over 50% of the invoice value of the books.

We expect an advance payment of 20% of the invoice value of the books we currently print, within the next week, in order to reduce the OD, but that does not even cover the paper, for which we have already exceeded the 30day payments terms, and had to make payment.

Loans for productive assets

A final tax payment for the year to 31st March 2016 is due on 30th September 2016 of Rs3.5M, when we are still owed that amount from the Govt. for invoices that are over 9months old. We DO NOT get any grace period to make the Corporation Tax payment, while we are financing the interest on the late payment of the invoices for Govt. work.

More important than this is the dire need to purchase machinery that can increase our production capacity, so we can increase turnover, replace inefficient, high energy consuming machines with the latest technology, which also has built in energy saving features.

The capital cost of the machine is Rs130 million, for which we need to borrow Rs100 million from a bank. However the current effective rate of interest of 15% on loans is too much. It does not make economic sense, especially when in the first year, where the new machine will only be working at 50% capacity, going up in following years. If however we are paying at similar lease rates where we are leasing a vehicle for the Managing Director, 9%, as the lease was arranged a year ago, we would go for the new machine immediately.

It is therefore ironic that we are funding a non-Productive asset, a motor car at low rates of interest, and we are unable to finance a high productive asset, which will never reduce in value in Rupee terms, as not only the evaluation of the business plan by the bank prior to granting a loan is ALSO arduous, but the interest rate currently prevailing is also usurious!

CONCLUSION

I have clearly and simply summarized for a lay person, the dilemma a company such as ours faces today in doing business legitimately in Sri Lanka.

We not only pay taxes to the Government for VAT which is currently 11%, NBT currently at 2% and Corporation Tax currently @ 28%, and EPF and ETF contributions currently at 23% of payroll, but have no relief.

The Finance Ministry is in the middle of drafting their budget for the year 2017, and requesting for suggestions from the public.

What would I say, in regards our business?

We would like a level playing field in that all businesses who earn profits must pay tax, or we should all be treated fairly. There are just too many businesses that are still under the radar, not even having a tax file, and therefore not paying taxes that are due.

Most importantly for us, I would like the Govt. to give us a three year interest subsidy of 500 basis points, for borrowings up to a maximum of Rs100M for the purposes of purchasing machinery, to increase capacity. In a world where our competitors overseas borrow at zero rates of interest, it is hard to compete if we have to borrow funds at 15%

Forcing private companies to make the mandatory payment of Rs2,500 more a month to our staff, was a move that affected profitability, and the ability to reinvest profits in expansion, both barriers to a growing Economy. With the labor shortages, depending on supply and demand the appropriate skills will command the higher wage rates, not just those that are dime a dozen, who were forcibly upped that skewed the wage differentials further.

It is clear to the reader of this real life example, that we have policy makers, who don’t know how business operates in the real world, and how their policies are killing the growth of the economy, while making political decisions, that they believe are necessary. The most important and urgent task is to allow companies to borrow for capacity improvement at rates much lower than for purchasing unproductive items such as Autos, for which financing schemes are dime a dozen with no questions asked.

In a Economy that is running at full employment, with severe labor shortages, that the state has singularly been unable to provide suitably qualified people to fill, we have no choice but to go for the latest labor saving technology, using the latest technology in the marketplace if we are to increase capacity, compete in the global marketplace, and grow our business, even catching the export markets for our products, which the latest technology will enable us to do.

(The writer can be contacted at ranjit.hulugalle at gmail.com. His blog can be accessed here)